Results tagged “banks” from Economic Alert

The IndyMac sale was finally announced on Friday. A group of private investors bought it for nearly $14 billion.

Hopefully, the sale ushers in a new era, where depositors can actually have confidence in their banks. And let's hope too that it drives a stake through an era when risk was sold off to others, and subprime mortgages and exotic loans were given seemingly without any restraint.

In the headline for the New York Times (it's only in the print version) is this "Agency vows to print as much money as needed..." 

I'm clearly flummoxed by what the brightest financial people (who I guess got us in this mess in the first place) think will be the best way to stabilize the economy. But I keep thinking that the cure is worse than the disease.

"At some point, and without knowing the timing, the Fed is going to have to destroy all that money it is creating," said Alan Blinder, a professor of economics at Princeton and a former vice chairman of the Federal Reserve.

It's interesting how a business can become a victim of its own success.

In a sense, that seems to be what happened to IndyMac.

Much of the lender's success was driven by so-called Alt-A loans, adjustable interest rate loans that were risky by market standards because many were issued to borrowers with questionable credit.

But when those borrowers began defaulting, and the market for investors who bought those loans dried up... IndyMac went down the tubes.

Of course, there's nothing new there. Everybody by now knows IndyMac's demise.

But Evan Wagner, spokesman for what after the FDIC stepped in is IndyMac Federal Bank, told me that IndyMac might not have been able to survive in a kind of "new world" of banking.

It had become so driven by the unique loans it was giving that it might not have been able to operate in a world of fewer banks.

"IndyMac had to become a conventional lender very quickly...and the margins were so much thinner," he said.

Dominic Ng, the president, CEO and chairman of East-West Bancorp Inc., had an interesting take on the semantics of "bailout" versus "rescue."

Basically, one man's "rescue" is another's bailout.

In a recent conversation on a story I was doing about his Pasadena-based bank's application for $316 million in funds from the Treasury's Troubled Assets Relief Program, he said what many, including myself, call a "bailout" of the banking industry is misplaced wording.

The program, in which the Treasury is injecting up to $250 billion into the nation's banks, is actually an investment, he said, because the government will ultimately "make a killing" off the preferred stocks it has purchased in these banks -- which are among the relatively healthiest around.

He said he understands how it can be perceived as unfair that the government is "bailing" out banks rather than homeowners.

But in effect, the injections of federal money into banks will ultimately calm the market, he said.

"The confusion is that people think that the Treasury is spending money to rescue these banks, instead of just investing at the right time," he said. "It seems like the administration is bailing people out..."

But it's truly a "bailout" when that money can't grow, he said. When the economy emerges from the doldrums, the government -- and hence the taxpayers -- will get a nice return, he said.

The federal government's action Tuesday to make $250 billion in preferred stock available to banks might be Treasury Secretary Henry M. Paulson's hope for getting the economy going again. But it was not a panacea for many, who feel the action is a socialistic attempt to interfere in the free market.

"It's the most ludicrous thing I've ever heard," said David Hornberger, a former banking executive who lives in San Gabriel.